Reform of Australia’s AML/CTF Regime

24 Oct Reform of Australia’s AML/CTF Regime

The Australian Parliament today had the second reading of the AML/CTF Amendment Bill 2017, which introduces revisions to the AML/CTF Act 2006 and its forerunner the Financial Transaction Reports Act 1998.

The Bill implements the first phase of reforms arising from the recommendations of the Statutory Review Report and is an important step in a significant program of AML/CTF reform for Australia.

The Bill’s second reading received bipartisan support and contains a range of measures aimed at strengthening Australia’s capabilities to address Money Laundering and Terrorist Financing risks, these incl

Expanding the objects of the AML/CTF Act to reflect the domestic objectives of AML/CTF regulation

Clarifying due diligence obligations relating to correspondent banking relationships and broadening the scope of these relationships

De-regulating the cash-in-transit sector, insurance intermediaries and general insurance providers; and

Strengthening AUSTRAC’s investigation and enforcement powers by giving the AUSTRAC CEO the power to issue infringement notices for a greater range of regulatory offences, and allowing the AUSTRAC CEO to issue a remedial direction to a reporting entity to retrospectively comply with an obligation that has been breached.

The Bill also expands the rule-making powers of the AUSTRAC CEO across a number of areas.

The Bill is estimated to deliver savings to industry each year for the ten years after the measures come into force totaling $36,086,393. This includes the deregulation of the cash-in-transit sector which equates to an annual offset of $32,683,251.

As the Bill has reached a important stage to becoming law, the following is a digest of the key changes contained within the AML/CTF Amendment Bill 2017, which will alter the Australian AML/CTF regime, is provided by Initialism that all reporting entities should take note of and condsider

Domestic objectives of the AML/CTF Act

The objectives of the AML/CTF have been focused on meeting Australia’s international obligation. A number of parties, including the late Joy Geary and Initialism’s Principals, have long agitated for a more domestic focus to support greater adoption and understanding of the benefits of AML/CTF activity to community.

The Bill revises the objectives of the AML/CTF Act to:

Provide for measures to detect, deter and disrupt ML, TF, and other serious financial crimes.

Provide relevant Australian government bodies and their international counterparts with the information they need to investigate and prosecute ML offences, offences constituted by TF, and other serious crimes.

Support cooperation and collaboration among reporting entities, AUSTRAC and other government agencies, particularly law enforcement agencies, to detect, deter and disrupt ML, TF, and other serious crimes.

Promote public confidence in the Australian financial system through the enactment and implementation of controls and powers to detect, deter and disrupt ML, TF and other serious crimes.

Regulating Digital Currencies

Digital currency exchange providers are not currently regulated under the AML/CTF Act.

Digital currencies largely operate outside the scope of the regulated financial system and are becoming a popular method of paying for goods and services and transferring value in the Australian economy.

The regulatory regime under the AML/CTF Act only applies to an ‘e-currency’ which is backed by a physical thing and excludes convertible digital currencies, such as Bitcoin, which are backed by a cryptographic algorithm.

The Bill introduces AML/CTF regulation to businesses which exchange digital currencies for money, and digital currency exchange providers will be required to:

Adopt and maintain an AML/CTF program to identify, mitigate and manage the ML and TF risks they may face

Identify and verify the identities of their customers

Report suspicious matters and transactions involving physical currency that exceed $10,000 or more (or foreign equivalent) to AUSTRAC, and

Keep certain records related to transactions, customer identification and their AML/CTF program for seven years.

This is an important amendment as the regulatory gap is also currently having an impact on the standing and public perception of the legitimacy of the digital currency sector, with some businesses choosing not to use or accept this payment method because of concerns about the risks associated with dealing with digital currency.

AUSTRAC CEO Enforcement Powers

Currently infringement notices can only be issued by the AUSTRAC CEO for a narrow range of offences

For all other regulatory offences, the AUSTRAC CEO must apply for a civil penalty order through the Federal Court.

It is felt that this process is costly and time consuming and does not always allow AUSTRAC to flexibly respond in a timely and proportionate manner that secures reporting entity compliance.

The Statutory Review Report recommended expanding the infringement notice provisions under the AML/CTF Act to include a wider range of offences established under the AML/CTF Act that are regulatory in nature.

The Bill implements this recommendation giving the AUSTRAC CEO more expedient and efficient means to promote and encourage compliance with these regulatory requirements.

This new power is limited to the AUSTRAC CEO and to maintaining the integrity of the AML/CTF supervision and enforcement regime, as well as ensuring a consistent regulatory approach is adopted.

To ensure that the AUSTRAC CEO gives due consideration to relevant matters before issuing an infringement notice, the AUSTRAC CEO must consider that issuing an infringement notice is appropriate in a particular case, after considering the following:

The nature and extent of the contravention

The seriousness of the contravention

The circumstances in which the contravention took place, and

Any other matter the AUSTRAC CEO considers to be relevant.

As these provisions may be triggered by relatively minor contraventions in the context of high-volume transactions, additional considerations AUSTRAC CEO must take into account have been included as a protection against the issue of infringement notices for relatively trivial matters.

The Bill also inserts a list of provisions which fall within the definition of ‘designated infringement notice provision’. These provisions are:

Customer identification procedures to be carried out by reporting entities

Reporting certain suspicious matters

Reporting a threshold transaction

Reporting an international funds transfer instruction

Reporting on compliance with the AML/CTF Act

Providing further information to AUSTRAC on request, and

Making and retaining certain records.

These provisions have been selected as they relate to conduct that would ordinarily be subject to a civil penalty under existing provisions of the AML/CTF Act.

By allowing the AUSTRAC CEO to issue infringement notices for contraventions, AUSTRAC will be able to more effectively and efficiently promote compliance with Australia’s AML/CTF regime.

The AUSTRAC CEO cannot also currently issue a remedial direction to require a reporting entity to retrospectively comply with an obligation that has been breached.

This deficiency has implications where a reporting entity has failed to submit threshold transaction reports, international funds transfer instructions, or compliance reports.

The Statutory Review Report recommended that the AUSTRAC CEO be given the power to require a reporting entity to comply with a remedial direction to lodge the required reports to provide a simpler means for AUSTRAC to secure reporting entity compliance and close financial intelligence gaps.

The Bill provides that the AUSTRAC CEO may give the reporting entity a written direction requiring the reporting entity to do one or both of the following:

Take specified action directed towards ensuring that the reporting entity does not contravene the civil penalty provision, or is unlikely to contravene the civil penalty provision, in the future; or

Take specified action to remedy the contravention by providing the relevant report to the AUSTRAC CEO within a time specified in the direction.

This enables the AUSTRAC CEO to require the reporting entity to submit the relevant report. This power is limited to the specified provisions as these reports (threshold transaction reports, international funds transfer instructions and compliance reports) should be given to AUSTRAC based on factual information available to the reporting entity, and provides clarity to reporting entities regarding the types of contraventions that will be subject to remedial directions.

To provide checks and balances regarding the remedial directions power, the AUSTRAC CEO must not use the remedial direction power:

If it appears to the AUSTRAC CEO that the contravention occurred more than 24 months before the day on which a direction would be issued, and

Unless the AUSTRAC CEO has:

Assessed the risks that have arisen in view of the contravention, and

Determined that giving a direction is an appropriate and proportionate response in the circumstances.

AUSTRAC CEO’s additional powers over the remittance sector

The Statutory Review Report recommended that the AUSTRAC CEO be given stronger powers to control the registration of registered independent remittance dealers, registered remittance affiliates and registered remittance network providers (remittance providers) in order to assist in addressing some of the ML and TF risks posed by the remittance sector.

The Report recommended that the AUSTRAC CEO should be allowed to deregister remittance providers that are not conducting remittance activities (as evidenced by a lack of reporting to AUSTRAC or other relevant activity).

Under the AML/CTF Act, the AUSTRAC CEO currently has the power to cancel a remittance provider’s registration if the registration involves, or may involve, a significant ML, TF or people smuggling risk, or if the person has breached one or more conditions of registration. However, the AUSTRAC CEO has no power to cancel a registered entity on the basis that it is inactive.

The Bill gives the AUSTRAC CEO the power to cancel the registration of a person who is registered on the Remittance Sector Register where the AUSTRAC CEO has reasonable grounds to believe that the registered person no longer carries on a service that gives rise to the requirement to be registered on the Remittance Sector Register.

Additionally, under the AML/CTF Act, the AUSTRAC CEO may decide to register a remitter if they are satisfied that it is appropriate to do so, having regard to ‘whether registering the person would involve a significant money laundering, financing of terrorism or people smuggling risk’.

The Bill replaces ‘or people smuggling’ with ‘people smuggling or other serious crime’. Thereby, extending the scope to include all serious crimes.

Cash in Transit

The AML/CTF Act lists collecting physical currency, or holding physical currency collected, from or on behalf of a person (item 51) and delivering physical currency to a person (item 53) as designated services.

These services are provided by cash-in-transit operators which are licensed at the state and territory level.

The ML and TF risks associated with these services are considered to be low, and as a result the Statutory Review Report recommended amending the AML/CTF Act to delete items 51 and 53 from the AML/CTF Act.

The Bill repeals items 51 and 53 of Table 1 of subsection 6(2) of the AML/CTF Act, and therefore deregulates businesses that provide these designated services.

Insurance intermediaries and general insurance providers

The Statutory Review Report also recommended that insurance intermediaries and general insurance providers, apart from motor vehicle dealers, should be deregulated.

The FATF’s international standards only require life insurance and investment-related insurance products to be subject to AML/CTF regulation.

The Bill therefore amends the definition of ‘cash dealer’ to remove insurance intermediaries and general insurance providers, and to include motor vehicle dealers acting as insurance intermediaries or insurers.

Correspondent Banking

The definition of a ‘correspondent banking relationship’ under the AML/CTF Act is thought to be unduly narrow and inconsistent with international banking practice. The narrowness of the relationships captured by this definition stems from the definition of a financial institution under the AML/CTF Act. The AML/CTF Act provides that financial institution means:

a) Authorised deposit-taking institution; or

b) A bank; or

c) A building society; or

d) A credit union; or

e) A person specified in the AML/CTF Rules.

Consequently, this definition of does not recognise certain correspondent banking arrangements that financial institutions can enter into with foreign entities, as those foreign entities are not considered to be financial institutions for the purposes of the AML/CTF Act.

Consultation with the financial sector revealed strong support for adopting a broader definition of a correspondent banking relationship to acknowledge that Australian financial institutions often enter into correspondent banking relationships with foreign financial services providers, which may not be considered a financial institution under the AML/CTF Act.

Consistent with the views of industry, the Statutory Review Report recommended that the AML/CTF Act should be amended to broaden the definition of correspondent banking in line with international approaches consistent with the FATF standards.

The Bill therefore amends the definition of financial institution may specify different persons to be financial institutions for the purposes of different provisions of the AML/CTF Act.

This amendment will enable the AUSTRAC CEO to make AML/CTF Rules to recognise a broader range of foreign institutions as ‘financial institutions’ with which Australian financial institutions may enter into correspondent banking relationships.

There are two types of accounts associated with correspondent banking:

Nostro account – an account that a bank holds, usually in a foreign currency, in another bank, and

Vostro account – an account that other banks have with the bank, usually in the bank’s domestic currency.

The Statutory Review Report recommended that the due diligence requirements regarding Nostro accounts be clarified, as industry stakeholders considered that the due diligence requirements appear to apply to both Nostro and Vostro accounts.

The intention of the AML/CTF Act is that the due diligence requirements only apply to Vostro accounts.

This is consistent with the FATF’s international standards and international banking practice.

Requiring due diligence on Nostro accounts is unnecessary as transactions within these accounts are originated by and conducted for a bank’s own customers.

The Bill amends the requirement to perform due diligence, so it only applies in relation to Vostro accounts.

Definition of a “Signatory”

The current definition of ‘signatory’ in the AML/CTF Act provides:

“Signatory, in relation to an account with an account provider, means the person, or one of the persons, on whose instructions (whether required to be in writing or not and whether required to be signed or not) the account provider conducts transactions in relation to the account.”

This definition has proven to be too broad in practice, giving rise to uncertainty among reporting entities.

Under the current definition it could be argued that a store employee could be considered a signatory to the store owner’s account if they conduct an EFTPOS transaction through a cash register.

The Bill replaces the current definition of a signatory with a definition that focuses on the account holder and persons who have been authorised by the account holder to manage or exercise effective control over an account.

This new definition excludes persons who may ‘instruct’ an account provider where this is incidental to a specific transaction or transactions, in circumstances that fall short of management or control of the account.

In Conclusion

The Bill is the first step of the program of AML/CTF reform for Australia, which are set out in the Attorney General’s Department Project Plan.

There will continue to be reforms to the AML/CTF Act and AUSTRAC Rules over the next couple of years, and this significant set of revisions should be welcomed as a positive first step towards strengthening Australia’s capabilities to address Money Laundering and Terrorist Financing risks.